UPSC STATIC QUIZ – Economy : 16 March 2024

Solution: a)

Only option 2 is correct.

The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).

Boom is the only stage where the demand is so huge that it greatly exceeds the existing supply/production levels. It is called over heating or heating up of the economy. It does not happen in the other stages as the demand is yet to recover fully.

Solution: b)

The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral.

There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation.

A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).

Solution: d)

Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors.

Solution: d)

Demand-Pull Inflation

This type of inflation is caused due to an increase in aggregate demand in the economy.

Causes of Demand-Pull Inflation:

• A growing economy or increase in the supply of money – When consumers feel confident, they spend more and take on more debt. This leads to a steady increase in demand, which means higher prices.
• Asset inflation or Increase in Forex reserves.
• Government spending or Deficit financing by the government – When the government spends more freely, prices go up.
• Due to fiscal stimulus.
• Increased borrowing.
• Depreciation of rupee.
• Low unemployment rate.

Effects of Demand-Pull Inflation:

• Shortage in supply
• Increase in the prices of the goods (inflation).
• The overall increase in the cost of living.

Solution: a)

A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate. When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs. In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.